What are the reasons for growing creditworthiness in GCC?

By Puja Sharma

“Our outlook for sovereign creditworthiness in 2023 in the GCC is positive. A revenue windfall from still-elevated oil prices, despite recent declines, will allow governments to lower debt burdens and rebuild fiscal buffers,” Moody’s, the rating agency said.

According to research by European ETF provider Tabula Investment Management Limited, around 97% of European institutional investors and wealth managers agree that the economic and fiscal reforms implemented by the Gulf Cooperation Council (GCC) countries have increased the region’s creditworthiness. Of those surveyed, 47% ‘strongly agree’ with this view.

Meanwhile, one in three (36%) surveyed strongly agree that the region’s large foreign currency reserves will help it maintain stable economic growth and lower bond risks when compared to other emerging markets. A further 61% indicate that they generally agree with this view.

Earlier this year, Tabula launched the first Gulf Cooperation Council (GCC) government bond ETF. The Tabula GCC Sovereign USD Bonds UCITS ETF (TGCC LN) provides exposure to a broad portfolio of USD-denominated government bonds issued by the six GCC countries (Saudi Arabia, the UAE, Qatar, Oman, Bahrain, and Kuwait).

The 2023 outlook for the GCC economies is positive as high oil prices continue to bolster fiscal positions and provide space for economic reforms, Moody’s Investor Service said in a report.

“Our outlook for sovereign creditworthiness in 2023 in the GCC is positive. A revenue windfall from still-elevated oil prices, despite recent declines, will allow governments to lower debt burdens and rebuild fiscal buffers,” the rating agency said.

Given the current market volatility and continued global economic uncertainty, 46% of institutional investors and wealth managers interviewed strongly believe that now is a favorable time for investors to reassess asset allocation decisions to increase diversification across regions and instrument types.

Finally, an overwhelming 96% of professional investors surveyed, firmly believe that as the GCC region undertakes numerous initiatives to diversify revenue streams away from oil and gas, a more granular allocation to the region could play a significant role in building more defensive portfolios.

In another report by Moody’s, Gulf banks have adequate liquidity buffers and rely less on confidence-sensitive markets. In Saudi Arabia, the banks will likely seek additional market funding due to substantial credit demand, making the use of more volatile market funding a stable 20 percent of tangible banking assets, said Moody’s.

In addition, Saudi banks tend to hold long-term bonds, with a large portion of their held-to-maturity books composed of floating-rate bonds.

“Current market volatility is increasing investors’ need to manage portfolio diversification,” said Tabula CEO Michael John Lytle. “In the emerging markets, most investors use very broad fixed income benchmarks with no ability to overweight specific geographies. We have found that many investors believe that GCC countries are going to be successful in using their current profits to develop new businesses outside of oil and gas. They are implementing this view through equities and lack the tools to do the same in fixed income. That is why we developed the TGCC ETF.”